Buying Sports Franchises: Investing For the Love of the Game

Professional sports teams owned by the likes of Paul Allen, George Steinbrenner and Jerry Jones are bought and sold for hundreds of millions of dollars. The Seattle SuperSonics were sold for $350 million in 2006 and the Boston Red Sox went for approximately $700 million in 2001, placing them firmly out of reach for most non-moguls. But sports teams in the minor and independent leagues, particularly when purchased through partnerships, could be a more affordable option for investors interested in watching games from the owner’s box.

Even minor league teams don’t come cheap: Minor League Baseball teams can range from $650,000 for rookie teams to $10 million or more for Triple-A teams, according to the official Minor League Baseball website. Minor League Baseball teams have the potential to bring in a net profit from 5 to 10 percent a year and appreciated an average of 3 to 5 percent annually as of 2006, according to Satisfaction Magazine.

Teams are often purchased by individuals, but multiple buyers can band together as part of a limited liability company (LLC). Anne Levinson, Ginny Gilder, Lisa Brummel and Dawn Trudeau formed Force 10 Hoops, LLC to purchase the WNBA’s Seattle Storm for $10 million in January. The concept of sports investment funds has generally been ill received—most investors want to put their money into specific teams with which they can be involved—but potential owners can put together their own groups to purchase a franchise. In such situations, there is often a majority team owner.

Such is the case with Harris Turer, majority owner of the Milwaukee Admirals and minority owner of the Milwaukee Brewers. The Admirals are a minor league hockey team owned by Milwaukee Admirals, LLC, a group of 12 investors.

A team owner oversees activities and can choose to take a hands-on approach

Investors could also start a new franchise within an existing league. “There are all kinds of startup costs [when creating a new team]. If it’s a brand new franchise, you incur costs recruiting people and getting the front office completely set up. There are a lot of startup marketing costs to let people know you’re coming to town,” Allen Fears, chief financial officer for sports consulting firm National Sports Services (NSS), said. “If you’re buying an existing team you’re going to pay more money to the existing owner but you’re not going to have those startup costs.” Starting a new team involves a lengthy application process, meeting the league’s legal requirements and proving one’s ability to financially support the team.

Often team owners function mostly as a chairman or chairwoman, overseeing activities without necessarily being involved in the day-to-day operations of the franchise. But owners interested in a more hands-on approach can certainly do so.

For both Turer and Merritt Paulson—owner and president of both the Portland Beavers, the Triple-A affiliate of the San Diego Padres, and the Portland Timbers, a United Soccer League team—running their teams is a full-time job. “I’m functioning as the day-to-day president and GM of both [the Beavers and the Timbers], so I’m literally signing every single check. You couldn’t be more involved,” Paulson said.

“The community side of this and the fact that this is my day-to-day job were big influencers [when selecting a team to purchase], but I couldn’t go in losing money either,” Paulson said. “To really find the right deal can take some time; for me it was four years....It can also be a costly deal process if you’re really going about it the right way and you’ve got a lot of support.”

Paulson employed a full-time consultant and legal representation during his search for the right deal. Sports consulting firms such as NSS are also an option for investors looking for support. NSS works with existing team owners as well as individuals interested in purchasing a team for the first time and provides ongoing franchise management services.

Since the purchase of a sports team is primarily a lifestyle investment—done for love of the sport rather than for financial returns—it’s important to have a healthy interest in the team one decides to purchase. But investors might be wise to avoid purchasing teams in which they are overly emotionally invested. Buyers who are too enamored with their chosen team could end up paying far too much for a team in a less-than-ideal market, according to Fears.

The purchase of a sports franchise involves extensive due diligence, including everything from reviewing contracts, leases and sponsorship agreements to meeting with the senior management team, Paulson said.

Team ownership is a team effort in itself

“Look at the market and talk to people in the market,” Fears said. “Maybe it’s a market that, on paper, seems like a strong market but it’s not drawing well, so you do a lot of due diligence to find out why that is. Maybe the organization wasn’t run very well and a new owner could buy the team at a discount, market and manage it well and do well financially with it.”

Investors should also realize that there are many expenses associated with team ownership beyond the initial purchase price. “Player costs are a huge issue that you need to factor in,” Turer said. “When you own a minor league hockey team, each team has an affiliation agreement with an NHL team. [This means] you pay ‘X’ amount of dollars to the NHL parent team...and they then supply the players. Your affiliation agreement is a very important factor.”

The office payroll is another important element to consider. Five people worked in the office when Turer’s group first took ownership of the Admirals. The small staff looked good from an expense standpoint, but it made running the team difficult. They now have a staff of 12.

Teams for sale don’t tend to be listed in the classifieds. Often the best way for investors to learn about opportunities is by networking with others in the industry. Fears recommends that potential buyers start their search on the Internet to find information about the sports and leagues in which they are interested. League offices can provide specifics on procedures and requirements and may even offer recommendations. Once a team has been selected, the negotiation and purchase process can be lengthy; from beginning to end, Paulson’s purchase of the Beavers and Timbers took approximately six months.

But, no matter how much they may love sports, investors should not invest in a team if they are not fully aware of the responsibilities placed on a team owner’s shoulders.

“A lot of people think it’s a fairy tale environment and it’s not. If you’re intending to invest and get involved in operations and management it’s a real job. It’s long hours and it’s hard work,” Fears said. Sports fans may also be more difficult to coax into stadiums because of the struggling economy, so owners need to be prepared to invest the extra money in marketing to get people into the seats.

“You’d better understand the financial risks and rewards and make sure that you can handle that,” Turer said. “What I found was that some people...weren’t committed completely to what it may take when things don’t go well. You’ve got to be committed to doing that and not just ready to jump ship or not participate if money is needed.”